You seem to be under the impression that the settlers represent the only group in Israel which is trying to sabotage any sort of peace settlement when that is clearly not the case. Those who wish to continue to do so are even in control of the government, and they have been for quite some time now.
It is much like white supremacy in South Africa. While they represented a sizable minority they depended on enough other whites going along with their practices. It wasn't until the majority of whites had had enough that things finally changed. Boycotts were a fundamental aspect of why this eventually occurred.
It is also why so many Israelis are so adamantly opposed to them. They know how effective this pressure really is. Israel is becoming more and more isolated from the rest of the world, just like what occurred in South Africa.
It is also the reason why so many Israelis don't trust Barack Obama. They know how crucial it is to continue to have presidents in office who unilaterally support whatever atrocities they may commit next. They know Obama has his limits.
Here are a few errors of your reasoning.
Israel is not South Africa: Pretty much every major wrongdoing by Israel is acknowledged by its own justice system, like it should with every democratic state that abides by the rule of law. Israeli leaders have been impeached for committing crimes while in office. South African apartheid however was pretty close to totalitarianism in that every aspect of the state, justice system included, was made to serve apartheid.
Furthermore, diplomatic isolation are not indicative of a nation's moral standing. Several of the nations involved in the diplomatic isolation of Israel, Saudi Arabia for example, are hardly targeted by any sanctions, yet is arguably pretty much the worst of the worst of any country in the world in terms of human rights. Note that it doesn't justify any wrongdoing by Israel, but worth mentioning nevertheless.
The majority of Israelis already support a two-state solution and so do most mainstream Israeli parties, including even Likud-Yisroel Beitanu. If the main function of boycotts are to change Israelis their mind, it largely unnecessary anyway.
You left my points about the possibility of the boycott having averse effects unaddressed. Namely, the possibility of a more pro-war attitude among the Israeli populace instead. Finally, US-Israeli relations aren't really the holy cow of Israeli politics as you imagine, given the tons of diplomatic incidents between Israel and the US and the past. The Israeli ultra-right (i.e. the most hard-core within the settlers) actually support cessation of accepting any further American aid. And Israel has offered China tons of lucrative arms deals.
How would it be if UK citizens started building houses on US soil without permission? It seems an absurd idea, doesn't it?
I'm not sure the US would wait for the UK government to do anything about it.
Libertarians...